How pay transparency can keep people from quitting

Even though Millennials expect it and tech companies hope it will minimize wage gaps, the idea of letting everyone in a company know everyone else’s salary is enough to make most senior managers cringe.

“Pay is a very emotional subject. People take it very personally,” observes Dave Smith, chief product officer at compensation data and software company PayScale. “So employers often just don’t trust that managers can handle difficult conversations about why someone’s pay differs from their peers’.”

Maybe not, but anyone worried about retaining talent might want to rethink that. PayScale surveyed more than 70,000 U.S. employees, looking for a link between pay and job satisfaction, and discovered a few surprises. For one thing, it turns out that how people perceive their pay matters more than what they’re actually paid. Moreover, the more information they have about why they earn what they do, especially in relation to their peers, the less likely they are to quit.

Consider: The main predictor of both “satisfaction” and “intent to leave,” PayScale found, is whether employees feel they are paid fairly. Yet even when people’s compensation is in line with their value in the job market, two-thirds believe they are underpaid. Of that huge group, about 60% report low job satisfaction, and say they plan to look for a new job within six months.

By contrast, the researchers found that, even at companies that pay below-market wages (some startups, for instance), if employees know why they’re paid less than they could probably earn elsewhere, 82% say they’re “satisfied” with their jobs and plan to stick around.

“Just explaining to people why they make what they make can have a dramatic impact on both satisfaction and retention,” notes Smith. For managers, though, “it requires a willingness to have some pointed conversations.” Explaining exactly why someone’s performance doesn’t merit the same pay as a coworker’s, for example, is nobody’s idea of fun.

Not ready for flat-out transparency, but anxious to keep key talent from feeling undervalued? One way to dip a toe in these waters is by trying something like what PayScale does in-house. Its employees “don’t know each other’s specific pay,” says Smith. “But we do disclose the median salary for each type of job. So employees can see whether they’re above or below it and have a reasonable discussion about it with their managers.”

Revealing median salaries, he adds, “also helps when someone who’s already over the median asks why they are getting a smaller raise” than a less-compensated peer who’s been doing great work.

One thing the PayScale study makes clear: Paying people more than their market value, in an effort to keep them from leaving, doesn’t work. “It’s more effective for employers to compensate employees at market value, and to be transparent about how pay was determined, than to overpay them and not discuss it.”

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